With a high cost of capital, many companies have taken a prudent approach to spending in recent years—but directors say that era may be coming to a close.
Directors’ perception of the current business conditions in the U.S. increased 4 percent in the third quarter, according to data collected in partnership with Diligent Institute as part of our Director Confidence Index conducted the last week of June into early July.
This increase nearly eclipses the losses incurred in the second quarter, when the Index dropped more than 5 percent, from 6.4 out of 10 (where 10 is Excellent and 1 is Poor) to 6.1/10.
Now at 6.3 out of 10, directors’ rating of the current landscape is just 1.5 percent away from its January high (6.4/10), and those polled attribute the upward swing to a healthy consumer and continued strong demand, amid market indicators that are continuing to move in the right direction.
When it comes to the year ahead, however, directors’ forecasts remain cautious: Our forward-looking indicator eked out a gain of slightly less than 1 percent in our latest polling, to 6.5/10 from 6.4 in April.
“A lot depends on the election,” said Paul William Hylbert, lead director at National Storage Affiliates, “but we’re hoping long-term rates will drop and foster a recovery.”
Some are skeptical.
“Feds will not lower interest rates enough to have an impact,” said Adam Crescenzi, the independent vice chair of the Clough Global Opportunities Fund board of directors.
Geopolitical risk is also weighing in the balance. Nigel Travis, chair of the Abercrombie & Fitch board of directors, is among those who cited “continued conflicts in Europe and the Middle East,” as a reason for a deteriorating forecast in the short term, along with, like many of the other directors we polled, “concerns over the election.”
Directors’ overall optimism so far into 2024 has proven more buoyant than in the past two years: at 6.5 out of 10 on average, vs. 6.2 in 2023 and 5.8 in 2022. Forty percent in our latest poll said they believe the business climate will continue to improve over the coming year—and 32 percent say it should be about the same. But this means 28 percent of directors, like Travis, expect conditions to deteriorate in the 12 months ahead. That number has risen from 20 percent in April.
While lower rates and the easing of credit appears as a positive driver for the majority of those polled, others argue that in many sectors, companies are running very tight ships and that the current level of government spending in support of both consumers and corporations cannot be sustained in the long run.
The Year Ahead
With the expectation of future rate cuts, directors say companies are beginning to position themselves to double down on investments in the months ahead. As some pointed out, significant sums are still waiting on the sidelines, ready for deployment once a few remaining headwinds come to pass, including the presidential election in the fall.
This perspective may help to explain why the proportion of directors who expect their companies’ revenues to grow in the year ahead decreased 3 percent in our last polling—to 79 percent, from 81 percent in April.
The proportion of those expecting profits to increase is also down, by double digits, from 77 percent in April to 69 percent in our last polling—though that could also be explained by the fact that the proportion of directors who expect their companies to increase capital expenditures in the year ahead is up significantly, from 30 percent in April to 44 percent in June/July (an increase of 46 percent).
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About the Diligent Institute
Diligent Institute informs, educates, and connects leaders to champion modern governance. We provide original, cutting-edge research on the most pressing issues in corporate governance; certifications and educational programs that equip leaders with the knowledge and credentials needed to guide their organizations through existential challenges; networks that convene directors and corporate executives to share best practices and insights; and awards and recognition programs that celebrate the accomplishments of those who champion modern governance. Learn more at diligentinstitute.com.
